Buy DB Realty; target of Rs 564: Anand Rathi Securities

Anand Rathi Securities is bullish on DB Realty and has recommended buy rating on the stock with a target of Rs 564 in its October 4, 2010 research report.

“DB Realty (DBRL) has total projects, 64% are for residential purpose. With 65m sqft residential properties – of which 33m sqft is in Mumbai City and 17.9m sqft in MMR (ex Mumbai), – DBRL has the largest value offering in the high-conversion (higher margin) Mumbai City. Around 70% of DBRL’s land is from slum rehab schemes (SRS), urban renewal schemes (URS) and public private partnership (PPP) projects that not only entail lower cost but also deferred payment vis-à-vis typical land acquisitions. One-third of the remaining 30% is in the form of virgin/millland projects which are in JDAs/JVs with land-owners and developers. This has resulted in high-value saleable area cost of only Rs 623 per sqft on purchase of land, and Rs 1310 per sqft, after PPP handover cost.”

“We have assumed a development schedule for most of DBRL’s properties, given SRS, PPP, URS and redevelopment projects and as land only accrues when the rehabilitation is undertaken/complete. Most new developments under construction/planned by DBRL are highrise buildings (+65 floors); such development is new to Mumbai. We have assumed development schedule of 5-6 years, 40% higher than company estimates (as the company follows a construction-linked payment plan). Given low base and new launches, we have expanded the construction expenditure, from Rs 10.4 billion in FY11e to a peak Rs 37.5 billion in FY13e, on account of more projects coming under execution than in the current portfolio.”

“DBRL’s cost of equity at 16.6% and cost of debt at 14.5% translates into WACC of 13.8%. Our Sep ’11 target price of `564 is the same as our Sep’11 NAV. We believe DBRL is attractively valued at FY12e P/BV of 2.2x, as regards strong earnings growth and high RoE (>40%). Downside risks are slowdown in property market and looming oversupply,” says Anand Rathi Securities research report.

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